Your 2011/2012 guide to non-concessional (after-tax) contributions

Non-concessional contributions are more popularly known as after-tax contributions. You may even hear them called ‘undeducted’ contributions. Such contributions are subject to a contributions cap, which sets a limit on the amount of after-tax contributions that you can make in one year (1 July through to 30 June). If you exceed the cap, your excess contributions are likely to be subject to penalty tax.

The non-concessional cap remains at $150,000 for the 2011/2012 year, and in future years will be indexed in line with increases in the concessional (before-tax) cap – six times the level of the (indexed) concessional cap. (I explain the concessional contribution rules in my article: Super concessional contributions: 2011/2012 survival guide).

TFN alert: Your super fund must have your tax file number (TFN) on record before you can make non-concessional contributions to a super fund. If your fund doesn’t have your TFN, you can’t make after-tax contributions.

No tax on non-concessional contributions

Non-concessional contributions are sourced from your after-tax income, which means the full contribution reaches your superannuation account, and no tax is deducted when the contribution reaches your super fund. No tax is deducted from a non-concessional contribution because you haven’t claimed a tax deduction, or received any other type of tax concession, before making these contributions.

Any earnings that a super fund earns on those contributions are usually taxed at a much lower rate than would be the case for earnings outside the super fund. Super fund earnings are taxed up to 15 per cent compared to marginal tax rates of up to 45 per cent (for 2011/2012 year) on individual earnings outside the super environment.

Is super tax-effective for everyone?

Under current laws, if you earn less than $37,000 in a year (for the 2011/2012 year), you have no real income tax advantages when investing via a superannuation fund, unless you’re eligible to take advantage of the government’s co-contribution scheme. The federal government places up to $1,000 of tax-free super money into your super fund when you make a $1,000 after-tax contribution. See my article on co-contributions: Cashing in on the co-contribution rules (2011/2012).

The Labor Government has announced tax cuts (taking effect from 1 July 2012) to offset the increase in the cost of living expected from the imposition of the carbon tax (on 500 of Australia’s biggest polluting companies). Subject to the legislation being passed, the tax cuts mean a higher tax-free threshold of $18,200, and higher marginal tax rates for incomes above $18,200 and below $80,000. What this means is that for those earning more than $20,542 (for the 2012/2013 year, subject to legislation) will be paying 19% income tax, compared to 15% tax on super fund investment earnings.

Note: Previously, the government announced that they intend to make super more tax-effective for Australians paying less than 15% income tax on wages and salary. The government intend to return any contributions tax paid on concessional (before-tax) contributions, such as your employer’s compulsory Superannuation Guarantee contributions. This tax refund, payable to a member’s super account, will take effect from 2012/2013 year (subject to legislation) I explain taxable contributions, that is concessional contributions, in our Super concessional contributions: 2011/2012 survival guide.

Can I contribute more than $150,000 during the 2011/2012 year?

If you’re under the age of 65, you can bring forward up to two years’ worth of non-concessional contributions, which means you can make up to $450,000 in super contributions in one year, representing your non-concessional (after-tax) cap over a three-year period.

Making a non-concessional contribution that is more than the annual cap is known as a ‘bring forward’. The maximum bring forward for the 2011/2012 year is $450,000. When you contribute more than $150,000 in non-concessional contributions in one year, you automatically trigger the bring-forward rules for the following two years. Let’s look at three examples.

• A $450,000 non-concessional contribution in one year: If you make a $450,000 non-concessional (after-tax) contribution to your super fund during the 2011/2012 year, say on 15 March 2012, you’re bringing forward two years of contributions for the purposes of the non-concessional contributions cap. You then cannot make another non-concessional contribution until July 2014 (that is, the 2014/2015 year).
• A $300,000 non-concessional contribution in one year: If you make a $300,000 after-tax contribution during the 2011/2012 year, say on 15 March 2012, that only brings forward one year of contributions, but it means you trigger the bring-forward rules for the next two years. You then can only make another $150,000 in non-concessional contributions during the two-year period that ends on 30 June 2014.
• A $180,000 non-concessional contribution in one year: If you make a $180,000 after-tax contribution during the 2011/2012 year, say on 15 March 2012, the $30,000 above the annual $150,000 cap triggers the bring-forward rules, which means over the next two years, you can make only $270,000 in non-concessional contributions.

Tip: The ‘bring forward’ rules are not available to Australians aged 65 or over. If you’re aged 63 or 64 however, you can take advantage of the ‘bring forward’ rules without satisfying the over-65 work test rules (see article: For over-65s: Ten super tips when making contributions) that would normally apply to contributions that cover future years.

What if I don’t use my non-concessional limit for one, or more years?

You must use it or lose it when it comes to the contributions caps. You can’t play catch-up with the annual cap, or the bring-forward rules — a ‘bring forward’ can only relate to contributions for future years, not past years. If you fail to utilise your non-concessional cap for one or more years, then the cap for those years is gone forever. Fortunately, the annual non-concessional cap remains in place until you’re 74, so if you don’t take advantage of the annual cap for a few years, you have an annual cap until the age of 74.

Does the annual cap apply per couple, or per individual?

The annual non-concessional (after-tax) contributions cap applies to each person, which means a couple can make up to $300,000 in non-concessional contributions for the 2011/2012 year, or up to $900,000 if they take advantage of the bring forward rules.

So, does that mean that I’m only subject to excess contributions tax if I contribute more than $450,000?

If you’re aged 65 or over, the maximum that you can contribute as non-concessional (after-tax) contributions is $150,000 for the 2011/2012 year, which means that any contributions over this amount are hit with a penalty tax of 46.5 per cent. The penalty tax is imposed on the individual rather than the super fund although you must apply for an amount equal to the tax liability to be withdrawn from your super fund account.

If you’re under the age of 65, and you contribute more than $150,000 in non-concessional contributions for the 2011/2012 year, then you trigger the bring-forward rules. You would only be subject to penalty tax if you exceed $450,000 in non-concessional contributions in one year, or you exceed the amount you can contribute under the bring-forward rules in the following two years after triggering the bring-forward rules.

Ten tips when making super contributions

If you’re under the age of 65, you don’t have to be working to make super contributions. If you’re aged 65 or over, however, you must satisfy a work test to make super contributions. I explain the work test and the other contribution rules for over-65s in my article: For over-65s: Ten super tips when making contributions.

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